The Tax Cuts And Jobs Act (TCJA) eliminated the employer tax deduction for qualified transportation benefits, effective in 2018. Unlike many TCJA changes for individuals, this unfavorable change is permanent.
Strategy: Don’t hit the brakes just yet. If certain requirements are met, these benefits are still tax free to employees, within the allowable limits.
Thus, this remains an attractive fringe benefit for employers to offer.
Here’s the whole story: Prior to the TCJA, Payments made by an employer for qualified transportation fringe benefits were deductible by the employer and tax free to recipient employees, up to certain monthly limits. There are three main types of transportation fringe benefits.
- Mass transit passes. Under the IRS approved rules, a transit pass includes any pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. Mass transit includes transportation by bus, rail or ferry.
- Commuter highway vehicle expenses. A commuter highway vehicle is any highway vehicle seating at least six adults (not including the driver). It must be reasonably expected that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces with the employees occupying at least 50% of the vehicle’s seats (not including the driver’s seat).
A tax-free arrangement may involve vanpooling in one of the following forms:
- Employer-operated vanpools: The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.
- Employee-operated vanpools: Employees independently operate a van for commuting purposes.
- Private or publicly operated vanpools: Alternatively, a vanpool can be operated either privately or publicly. The arrangement qualifies if the van seats at least six adults (excluding the driver), but the “80/50 rule” (see above) doesn’t have to be met.
- Parking allowances. This covers employer provided parking for employees on or near the business premises. It also covers fees for parking on or near the location from which employees commute using mass transit, commuter highway vehicles or carpools (e.g., a park-and-ride lot at the train station). However, it doesn’t extend to parking at or near the employee’s home.
Tip: For 2019, the maximum tax-free allowance for transit passes and commuter van pooling (separately or combined) is $265 per month. The separate maximum tax-free allowance parking is also $265 per month.
Bicycle commuting: Stop and go
In addition to the three main transportation benefits, an employer could also provide a fringe benefit to cyclists who ride their bikes to and from work.
Alert: The TCJA preserves the employer’s deduction for bicycle expense reimbursements as business expenses, but eliminates the tax exclusion for employees. This applies to amounts paid or incurred from 2018 through 2025.
Before the TCJA, a maximum monthly tax-free allowance of $20 could be used to pay for reasonable bicycle commuting expenses, such as the cost of a bike, repairs, improvements and storage. However, this tax-free benefit wasn’t available in conjunction with any other tax-free transportation fringe benefit.
Tip: There is no dollar limit on deductible reimbursements for bicycle commuting, but they are treated as additional employee compensation subject to withholding and payroll taxes.
Small Business Tax Strategies